Factors that cause property price appreciation

[ecis2016.org] ecis2016.org News lists some factors that contribute to property price rise

Real estate has always been considered as a fruitful asset in one’s investment portfolio, for the short term, as well as long term. Property is one of those few assets, which can offer you returns that are higher than the inflation rate. However, only a modest part of the population manages to invest in real estate, out of which only fewer can understand how the property market works and what really contributes to price appreciation in the property market.

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What causes property price appreciation?

Infrastructure development

Infrastructure development plays a key role in price appreciation. Any new connectivity, transport, road, or transit hub, will act as a growth driver, as these are expected to bring more population and ultimately, more demand. Investors who time the market right, can get the most out of their real estate investment.

Let us understand this with an example.

Gurgaon’s property market is currently witnessing major demand from end-users and investors. New projects being launched in the region, are seeing major footfalls from serious buyers. This is because the upcoming Dwarka Expressway, a major infrastructure project, will boost connectivity between the national capital and Gurgaon. As a result, properties located along this stretch will become more attractive and fetch better returns for the investors. A similar trend was noticed when the Noida-Greater Noida Expressway was under construction. Prices moved from Rs 2,000 per sq ft to Rs 5,500 per sq ft in a matter of a few years, along this project. Similarly, localities where the Mumbai Metro had traction witnessed triple-digit price appreciation in just five to six years.

Upcoming or available amenities

Imagine a property without a parking space. Now, think of a similar property, with a parking space. This additional amenity can create a price difference of 10%-15%, especially in metro cities where parking in residential colonies may be a hassle. Property owners, who continue to upgrade their property, can get a better rate than the prevailing market rates. This could be a basement garage or a mini terrace garden or a kitchen lawn. In addition to this, the architectural design, upkeep and interiors of the property, also play a pivotal role in price appreciation.

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Local development

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For a property market to appreciate, it is very important that the local neighbourhood and the social infrastructure, support growth. A property in a gated residential colony with a functional residents’ welfare association (RWA) will be preferred to a stand-alone property located in a regular colony. Similarly, green cover, security surveillance, facilities in the immediate neighborhood and type of gentry residing in the area, can also result in property appreciation. In an area, where stand-alone properties give way to independent floor constructions, the properties may become more preferred but it may not appreciate in terms of value.

Policy changes

One major policy that directly impacts real estate appreciation, is lending rates. Cheaper cost of borrowing brings more buyers to the market, creating more demand and appreciation. Similarly, reductions in stamp duty rates, circle rates, GST rates, income tax benefits, etc., directly impact demand.

Similarly, the introduction of the Real Estate (Regulation and Development) Act, 2016 (RERA), brought a lot of confidence amongst home buyers. This may not impact property prices directly but the streamlining of processes and fixing of accountability on promoters and real estate builders under the states’ real estate regulatory authorities, have infused trust in the sector, where home buyers can appeal against the wrongdoings, such as possession delays or change in the master plan without their consent, etc. This kind of transparency helps in the overall development of the real estate sector.

Economic situation

A country’s economic condition also plays a vital role in property appreciation. If the inflation rate is high, the value of money will reduce. This means that a builder would need to spend more on input items like construction materials, labour, permits, etc. However, this does not imply that the property prices will rise, irrespective of the growth drivers. For prices to grow, properties have to meet several requirements, including accessibility, infrastructural requirement and availability of residential properties. In addition to this, the overall economic indicators such as GDP, purchasing power parity and unemployment rate, also contribute to price growth in the long run.

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FAQ

Top 5 factors that make property prices appreciate

By Anil Pharande

Today, not just investors but even end-users check for property price appreciation potential before buying a home. We list the 5 important factors that cause property prices to appreciate

November 26, 2018: Real estate investors are always keen to buy a property when they know that it will gain in capital appreciation but it is not only property investors who are attracted by this phenomenon. There is also greater interest from end-users for buying rather than renting homes, since real estate appreciation means that their asset becomes a greater source of financial security going forward. Appreciation also opens up the possibility of selling the first property and buying a bigger and better one should the need arise, which usually does as the family grows.

Factors that cause property prices to appreciate

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So, what is it that makes residential property prices increase in some locations? The phenomenon of capital value appreciation or growth of a property’s market value over time happens because of various factors, including:

• The supply and demand dynamics of a particular location.
• How fiscal inflation is behaving.
• The interest rates banks charge for home loans, meaning the cost of borrowing.
• The development of new infrastructure or other new real estate market drivers such as schools, shopping malls, airports or increased public transport facilities in a particular area.
• Growth in local population, leading to increased demand.

1. Demand and supply

When there is increasing demand for homes in a certain area, property prices go up if the amount of residential real estate projects being built to meet the demand is not catching up fast enough. In other words, people buying homes for their own use (end-users) are willing to pay more for a home because living in that area is attractive and desirable. End-user demand also attracts the attention of real estate investors, who purchase residential properties with the view of putting them on the market again when supply in the location reduces and prices consequently increase further. The ideal window of opportunity for end-user buyers to buy a home in areas with high appreciation potential, is the period when investor activity has not yet begun in earnest.

2. Fiscal inflation

Inflation is caused by excess money being in circulation, which essentially causes the value of money to reduce. When this happens, the prices for several input items like the cost of land, construction materials, construction labour and statutory building permits, also increase. Of course, inflation will not result in increased property prices in an area if the location itself is deficient – meaning that it has poor accessibility and social and civic infrastructure, or if it has seen an oversupply of residential projects already.

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3. Cost of borrowing (interest rates on home loans)

The upward or downward movement of home loan interest rates, has a direct correlation to real estate appreciation. When the cost of borrowing increases, the demand for homes slows down because fewer buyers can afford the higher EMIs. Likewise, when home loan interest rates decrease markedly, affordability increases and market sentiment improves, leading to higher demand for residential property purchase.

4. Property market drivers

With specific pertinence to residential real estate, the term ‘market drivers’ refers to all and any developments in an area that positively impact the desirability and convenience of living there. These can include:

• The development of new office complexes in the area.
• The arrival of a shopping mall or hypermarket.
• The proximity of educational institutes and hospitals which reduce traveling time to such important establishments.
• Zoning regulations in an area that prevent excessive development from happening to cause further densification, thereby, preserving the available open spaces, greenery and overall ambience of the location. This is particularly true in integrated townships.
• Public transport facilities which ensure that the location is accessible by road, rail or even air.
• Any new infrastructure projects which boost the overall quality of living in the location, such as flyovers to reduce traffic congestion, water reservoirs, etc.

5. Population growth

Finally, the growth of population in a location obviously results in increasing demand for housing there. Increased demand directly translates into faster appreciation in real estate prices.

 (The writer is chairman, Pharande Spaces)

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